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October 30, 2003
Emerging Markets Represent Underdeveloped Opportunities for SRI, Study Says
    by William Baue

An International Finance Corporation report on socially responsible investing in emerging markets finds obstacles and opportunities.

Although socially responsible investing (SRI) is predominantly practiced in developed countries, the issue that galvanized the SRI movement emerged from a developing country: opposition to apartheid in South Africa. The movement has solidified with $2.7 trillion in assets investing in SRI worldwide. However, only a tiny portion, 0.1 percent or $2.7 billion, is invested in SRI in emerging markets. So says a study that the International Finance Corporation (IFC), the private sector arm of the World Bank, released last week in Tokyo at the United Nations Environment Programme Finance Initiatives (UNEP FI) Global Roundtable, Sustaining Value

The report, entitled Towards Sustainable and Responsible Investment in Emerging Markets, describes the history and current landscape of SRI investing in emerging markets. Authors Ricardo Bayón, Julie Cheng, and Marc de Sousa-Shields of Mexico-based Enterprising Solutions Global Consulting also project the future trajectory of SRI in emerging markets and make recommendations on how best to guide this development.

“We do not see rapid, ‘organic’ growth of SRI in emerging markets over the short term,” the authors write in the report. “In the medium and long term, however, growth prospects appear solid, particularly among institutional investors (both in developed countries and emerging markets), fueled by promising SRI fund performance, improving regulatory standards, growing demand for SRI, and increasing acceptance by institutional investors of SRI as a financially worthy and even desirable approach.”

One positive aspect of such reports is gleaning new insights on historical developments. For example, as early as 1982, the State of Connecticut adopted the Sullivan Principles, a code of conduct for companies doing business in South Africa drafted in 1976 by General Motors (ticker: GM) Board member Reverend Leon Sullivan, the report reveals.

Now, South Africa is home to more SRI assets than any other emerging market, with $228.2 million in 5 retail funds. This dwarfs the amount of SRI assets in emerging markets held by developed country retail social investors, which totals only $39.7 million. The South African retail SRI equity funds also demonstrate the report’s point that SRI can generate competitive returns. Over one and three years, these funds outperformed their benchmarks, both the FTSE/Johannesburg Securities Exchange (JSE) free float index as well as the MCSI World Index.

The report acknowledges the difficulty and imprecision of estimating the opportunities that exist for SRI in emerging markets, though this does not prevent the authors from hazarding a guess. According to a poll of US social investment professionals conducted by Enterprising Solutions, the potential demand among US social investors for high-risk emerging market investment could be as much as $4.5 billion. In a separate survey, the authors interviewed 12 US institutional and retail social investment professionals, who estimated the demand for all emerging market asset types from their clients to be between $500 million and $700 million.

The report also points out the obstacles to emerging market investment for social investors, some of which differ between those in developed countries and in emerging markets. One common challenge is the lack of credible, standardized data on business practices related to social and environmental issues. Again, South Africa represents an exception, as Sustainability, Research & Intelligence (SR&I), a corporate social responsibility (CSR) data provider there, offers robust research that will be used to constitute the new FTSE/JSE SRI Index that will be launched shortly. This illustrates the report’s point that the practice of SRI often spurs the production of reliable corporate social responsibility information.

Still, the report recommends support for increasing and improving access to SRI corporate performance data to promote SRI in emerging markets.

“Given the great diversity among emerging markets, multiple sources of corporate social and environmental data will be required to support greater SRI in emerging markets,” the report states. “To increase creation of and access to sources of such data, it is recommended that private sector emerging markets corporate social and environmental performance data suppliers be supported.”

Other recommendations to promote SRI investment in emerging markets include supporting global, national, and regional SRI networks, motivating increased institutional and retail SRI investment, and harnessing the IFC’s own resources in the direction of SRI.


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